Timing / Market Conditions

What is your opinion on buying a commercial retail strip (under 3 to 4M) now v/s waiting 6 months more?I see some comments that there may be significant price reductions in next 6 months.Wants to get perspective from experts.

Answer(s)

Depends a lot on where you are. In many areas there is increasing unemployment which will have an adverse effect on business. Vacancy rates will increase as a result and rents will decline followed by prices. That said, there are some areas that are in the Recovery Phase of the cycle. One usually can't see when the Recovery Phase starts until after it has happened (bottom of the market). The earlier you enter the the Recovery Phase the more you have a chance to make.

If I'm not mistaken, you were looking in the San Jose area. Articles from the IRR-Viewpoint to Colliers and most other in the area are going to suggest that it still does have a bit to go down. Colliers suggested recently (2Q) that it has another 5% to go. I personally believe they're pretty close. There would be TONS of foreclosures in the CMBS market, but by now most banks, lien holders and bond holders have figured out that they might as well take a small loss and restructure the loan vs. foreclosing - something that took banks in the residential market almost two years to figure out. My advice, if you see something that makes your desired return, go for it. I always tell my clients to not be greedy. Most people don’t complain about “missing the bottom” if they’re making their desired return yearly. Usually they complain about the investment they SHOULD have bought but didn’t.

Srini, I wouldn’t expect it to be 10% cap without interest rates spiking up a good 3-4%. In other words, you're not going to get what you're looking for in the Bay Area. A drop of 5% like I mentioned earlier means if you bought something for $4M you would save $200k by waiting "for the bottom". I highly doubt retail is going to crash to the point of a 10% cap in our area. To give you an idea of how that would work, if a property was for sale at 7% cap now @ $4M, the price would have to fall to $2.8M - a 30% drop in price. If that's what you're set on waiting for without having interest rates spike up, I have a feeling you will be waiting for much longer than six months.